The Insane Difference In The Rules For Journalists And SEC Employees When It Comes To Trading Stocks

Steven Perlberg, provided by

Published 6:43 pm, Tuesday, March 4, 2014

Can a Reuters reporter who writes about Apple own AAPL?

Can she sell her shares if she has a negative, market-moving story dropping the next day?

The answer is no, according to Reuters' handbook. The news organization "strongly advises" its journalists to "not engage in short term trading activities of any kind."

When it comes to the specific stocks they have covered or may cover in the future, the policy is even more stringent.

"Journalists of all media (and members of their immediate families) must not buy or sell securities of entities about which they have written, commented or reported recently or about which they intend to write, report or comment on in the near future," the handbook reads. "The test is whether the editorial activity might continue to have an impact on the securities, but at a minimum, there should be 28 days (four calendar weeks) between editorial activity and trading of securities."

If only the policy at the SEC were as strict.

Two researchers recently got ahold of trading records at the agency, finding that SEC employees have a strange knack for avoiding the kind of bad news — say, an investigation — that often derails a stocks price.

Emory University professor Shivaram Rajgopal and Georgia State University accounting PhD candidate Roger M. White discovered how SEC employees tend to sell a company's stock right before the SEC takes action against that company.

Stocks sold by SEC employees underperform the market by about 8%, according to the paper.

"In short, it appears that SEC employees continue to take advantage of non-public information to trade profitably in stocks under their regulatory purview," they write.

And as it turns out, top financial news organizations have stricter trading rules for its reporters than the SEC has for its investigators, the very people tasked with purging the financial industry of insider trading malfeasance.

After the new study raised eyebrows, here's how the SEC explained its policy to the Washington Post:

"Each of the transactions was individually reviewed and approved in advance by the Ethics office," said John Nester, spokesperson for the SEC. "Most of the sales were required by SEC policy. Staff had no choice. They were required to sell."

Nester explained that before staff can work on an issue that involves a company, they have to sell any holdings of stock in that firm. As a result, he said, there shouldn't be any surprise that a sale would precede the announcement of an enforcement action.

Alternatively, SEC investigators could just not be allowed totrade. Or as Bloomberg's Matt Levine writes, "put all your individual stocks in a blind trust" would also probably work.

By forcing SEC employees to sell the stock of the company they are about to investigate, you get SEC employees avoiding losses by trading on proprietary nonpublic information. The flipside of requiring SEC employees to hold the stock, Levine notes, isn't much better — they would theoretically take it easier on the companies in their investment portfolio.

Other ethics policies leave less to the imagination.

Bloomberg News has a similar one to Reuters, stressing that "team leaders, bureau chiefs, managing editors, executive editors and the editor-in-chief" should favor independently managed mutual funds over individual stocks. Here's a key excerpt from its ethical gospel, the "Bloomberg Way":

Our journalists may not, through a direct buy or sell relationship, acquire any position in any individual equities, bonds or other financial instruments in companies or industries that they cover. Any interests in these companies should be held through mutual funds or through similar arrangements where the decisions to buy, sell or hold the securities are made by an independent money manager or trustee.

...In keeping with the obligation of all Bloomberg LP staff, no news employee may profit from news, data or information learned in the course of employment that has yet to be made public.

And in the interest of full disclosure, here's an excerpt of our policy at Business Insider:

Journalists who regularly cover business and financial news may not play the market: that is, they may not conduct in-and-out trading, speculate in options or futures or sell securities short. Any of these actions could create an appearance of exploiting information not available to the public. Staff members who regularly cover business aspects of technology or other subjects are also subject to this rule. All Business Insider employees are expected to conduct themselves at all times in a manner that leaves no grounds for belief, or even suspicion that...an employee, an employee’s family, or anyone else connected to an employee made financial gains by acting on the basis of "inside" information obtained through Business Insider employment before that information was available to the general public.

Financial reporters, duty bound by their employers, cannot buy or sell a stock that they have reported on. And they cannot sell a stock that they "intend" to report on, thereby avoiding losses that might arise from their reporting.